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The countdown has started

The countdown has started

A review of some decisions that can save you a little – or even a lot – at tax time… As long as you act before the year ends.

In a few more days, thousands of us will have the pleasure of receiving gift cards we can use to treat ourselves in our favourite stores. But there are gifts we can give ourselves, too, that might be worth even more than all those gift cards. What are they? Just a few small actions that could result in some big income tax savings next April.

Here are a few examples:

  1. Using losses to win
    If you have investments that are not in a registered plan such as an RRSP, TSFA or RESP, be aware that any capital gains or losses you realize can be applied against each other for income tax purposes. For example, accumulated losses from past years can be carried forward and applied against a capital gain realized this year, thus reducing your tax bill. Even better: if you realize a capital loss before year-end by selling an investment that has lost value, you can apply it against capital gains for this year or the previous three years.
  2. RESP: pass go, collect $7,200
    RESP contributions allow you to claim grants equal to at least 20% of your annual contribution (depending on the province). During the life of the plan, the Canada Education Savings Grant (CESG) alone can add up to $7,200. Entitlement for the grants, or “grant room”, does accumulate, but to receive a payment for 2013, you must make your RESP contribution before the end of the year.
  3. RRSP: a gift to yourself
    You have until March 1 to complete your RRSP contribution for 2013 and be eligible for the related tax deduction, but why not think of your RRSP contribution as a holiday expense and maximize it right now? That way, there’s less risk of other holiday expenses eating into the amount available for your RRSP come February.
  4. TFSA: Take Full Savings Advantage
    With a contribution limit that rose to $5,500 in 2013 and will keep going up, the TFSA is becoming increasingly attractive as a tax-sheltered savings vehicle. TFSAs don’t provide a tax deduction, but they are more flexible than RRSPs in many respects if you want to withdraw funds before you retire. Anyone who was 18 or older in 2009 could have up to $25,500 in a TFSA by now. An important consideration: if you are thinking about making a withdrawal in the near future, you might want to do it before the end of 2013: that way, you will free up equivalent additional contribution room for 2014. Otherwise, you won’t be able to redeposit the amount you took out until 2015.
  5. Mutual funds: a little patience could be worth a lot of money
    If you own mutual funds, you probably already know that many of these distribute any income and capital gains for the year to their unitholders, usually a few days before year-end. These distributions are fully taxable for the investor unless the fund is held within a registered account. If you are thinking of buying mutual fund units in the near future, it might be to your advantage to wait until early 2014. Otherwise, next April you’ll be paying taxes on a fund that you’ve just purchased.
  6. HBP: no rush
    Are you planning to take advantage of the Home-Buyer’s Plan (HBP) to buy or build a house? Since you have until October 1 of the year following the withdrawal to go ahead with the purchase or construction, you might want to wait for early 2014 to make your withdrawal. This would give you until October 2015, instead of October 2014, to go ahead with your plans. Another reason: if you were thinking of making withdrawals after January 2014, it would be better not to make any now given that, under the HBP terms and conditions, all withdrawals have to be made within the same year or in January of the following year.
  7. Employees, think of your boss (and vice versa)
    If you work in a business that usually pays year-end bonuses, be aware that an employer can generally give an employee gifts and awards worth $500 per year without triggering any tax consequences for the employee, providing it is a non-cash gift. Okay, it might seem a little strange to ask the boss for an iPad for Christmas, but keep in mind that the same $500 given in cash would be fully taxable.
  8. Your business, a family affair
    If you own your own business, the time has come to sit down with your accountant and figure out the best combination of salary and dividends to pay yourself, because these two forms of income are taxed differently. Under certain circumstances, your spouse and children could also be part of the equation, and this could be an advantage if they are in a lower tax bracket (which is usually the case for children, at least).
  9. Acquire, amortize
    If you work for yourself or own a small business and you’re thinking of buying equipment, it could be advantageous to note that half of the usual amortization rate could be applied in 2013, even if the equipment is acquired and put into service in the last few days of the year.
  10. Give without keeping score. Oh, wait: keep score.
    If you make a donation to a charitable organization in the form of securities instead of cash, in addition to gaining a tax credit, you could also avoid the capital gains tax that would otherwise be associated with disposal of the asset. And with that, you might even be able to afford a larger donation! A smart way to give, especially at this time of year.
  11. Doing the math for retirement
    And finally, if you are nearing retirement or already retired, keep in mind that a great number of decisions can have a major impact on your net income, and that it could be in your best interests to consult an expert in the field. These include: the option offered by tax authorities of splitting your retirement income between spouses to optimize the couple’s combined tax rate (a measure that can translate into thousands of dollars each year), and the famous Old Age Security (OAS) clawback threshold: be careful not to cross it if you don’t want to pay back part or all of your OAS benefits. And a note to those who turned 71 this year: don’t delay consulting with a tax expert to plan your final RRSP contributions and the use of your RRSP to open an RRIF or purchase an annuity.

One last thing: please don’t take this overview as an exhaustive list! Between now and year-end, many other decisions can be made that will have an impact on your income tax return. In short, this might be a good time to contact your financial security advisor, accountant and/or tax specialist.

Happy end-of-2013!